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Project on Capital Structure in Ultratech Cements Limited:

Problem Definition Capital Structure:

Problem Definition Capital Structure The assets of a company can be financed either by increasing the owners claim or the creditors claim. The owners claims increase when the firm raises funds by issuing ordinary shares or by retaining the earnings, the creditors’ claims increase by borrowing . The various means of financing represents the “financial structure” of an enterprise .The financial structure of an enterprise is shown by the left hand side (liabilities plus equity) of the balance sheet. Traditionally , short-term borrowings are excluded from the list of methods of financing the firm’s capital expenditure, and therefore, the long term claims are said to form the capital structure of the enterprise . The capital structure is used to represent the proportionate relationship between debt and equity. Equity includes paid-up share capital, share premium and reserves and surplus .

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The value of the firm depends upon its expected earnings stream and the rate used to discount this stream. The rate used to discount earnings stream is the firm’s required rate of return or the cost of capital. Thus, the capital structure decision can affect the value of the firm either by changing the expected earnings of the firm, but it can affect the reside earnings of the shareholders. The effect of leverage on the cost of capital is not very clear. Conflicting opinions have been expressed on this issue. In fact, this issue is one of the most continuous areas in the theory of finance, and perhaps more theoretical and empirical work has been done on this subject than any other. If leverage affects the cost of capital and the value of the firm, an optimum capital structure would be obtained at that combination of debt and equity that maximizes the total value of the firm or minimizes the weighted average cost of capital. The question of the existence of optimum use of leverage has been put very succinctly by Ezra Solomon in the following words. Given that a firm has certain structure of assets, which offers net operating earnings of given size and quality, and given a certain structure of rates in the capital markets, is there some specific degree of financial leverage at which the market value of the firm’s securities will be higher than at other degrees of leverage? The existence of an optimum capital structure is not accepted by all. These exist two extreme views and middle position. David Durand identified the two extreme views the net income and net operating approaches.

Objectives:

Objectives

Hypothesis:

Hypothesis The relationship between EBIT and Firm value The Financial leverage has a positive effect on firm value up to a point and negative effect thereafter.

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The Aditya Birla Group is among the top 10 cement producers globally Incorporated on 24 August 2000 as L&T Cement Limited Cement business of Larsen & Toubro Limited demerged and vested in company in 2004 Grasim acquired management control in July 2004 Together with Grasim, one of the largest cement producers in India Name changed to UltraTech Cement Limited with effect from 14 October 2004 Narmada Cement Company Limited amalgamated with UltraTech in May 2006 Cement business of Grasim demerged and vested in Samruddhi Cement Limited in May 2010 Samruddhi Cement Limited amalgamated with UltraTech Cement Limited in July 2010 UltraTech Cement Middle East Investments Limited, a wholly owned subsidiary of the Company has acquired management control of ETA Star Cement together with its operations in the UAE, Bahrain and Bangladesh in September, 2010 Company Profile

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Market cap of over Rs. 300 billion Approximately 364,000 shareholders Over 96 per cent of shares dematerialized 5,725,359 GDRs as on 30 June 2011 Dividend of 60 per cent EPS of Rs. 24.93 as on 30 June 2011 NECS / ECS facility available for dividends Transfer-cum-demat facility Company Profile

EBIT-EPS analysis:

EBIT-EPS analysis

effectiveness of financing decision on EPS and EBIT :

effectiveness of financing decision on EPS and EBIT The overall cost of capita is thus the minimum required rate of return on the assets of the firm. The above chart is an illustration for the relation between actual WACC and actual ROA which describes the return on assets are always more than WACC. So, the expectation of minimum return on assets are alive.

leverage analysis :

leverage analysis Debt ratio: the ratio of debt to total capital Debt-equity ratio: The ratio of debt to equity Interest coverage: the ratio of net operating income (or EBIT) to interest charges